Expansion plan lifts Tata Steel 4%

The stock of Tata Steel jumped 4 per cent on Wednesday, after the company laid out its growth and carbon reduction strategy over the next 10 years. However, analysts have a mixed view with CLSA remaining more bullish even as others have moderate expectation on the stock.

CLSA, which maintains its Buy rating on Tata Steel but revised up the price target to ₹1,450, said: “Given strong cash flow generation over the next few years we believe this provides bandwith (₹27,000 crore) for inorganic expansion. Most of this inorganic expansion is likely to be in the long product portfolio (2030 target: 10 mt), in our view.”

CLSA raises its FY22-24 EBIDTA by 3-6 per cent to factor in stickier spreads in India and Europe. “Hence we raise target price from ₹1,362 to ₹1,450,” it added.

The stock on Wednesday closed at ₹1,217.80, up 4.38 per cent, on the BSE.

‘Conservative estimates’

Priority for Tata Steel is to maintain Net Debt/EBITDA below the 2x ceiling across cycles over the long term.

“We find it conservative due to strong steel upcycle and no major acquisition. As there is no acquisition envisaged in flat products, we do not expect any high cost acquisition in the next two years. As a result, we expect Tata Steel to tone down its Net debt/EBITDA target in March 2022,” said Centrum Broking, which reiterated its Buy with a target price of ₹1,577.

Factoring cyclical downturn

While no new projects were announced, the organic capex plan of ₹50,000–60,000 crore in India over the next five years indicates more brownfield expansions (beyond KPO-II) are likely to be initiated soon to achieve the targeted doubling of India capacity by 2030, said Motilal Oswal Financial.

“While Tata Steel should be cash flow-positive in FY22, high sustainability capex of £300–350m p.a. ($40–50/tonne of volumes) would be a burden in the case of a cyclical downturn. Thus, we assign a Neutral rating, with target price of ₹1,215,” it added. Management clarified that 2x is upper bound and will be tested only if anything meaningfully attractive (mostly inorganic) comes to notice, said ICICI Securities.

“Through-cycle Return on Invested Capital (RoIC) has been targeted at 15 per cent plus; additional filter of 12 per cent plus carbon cost adjusted IRR for project capex has been put in place; capex is also being directed to downstream value addition of 4.6 mtpa – some more commentary on expected capex and RoIC on the same would have further helped the narrative, in our view,” it added.